When speaking with mortgage lenders about interest rates, you may be offered multiple rate options, including the purchase of discount points. Discount points are an upfront cost that permanently lowers the borrower’s interest rate. They will decrease your monthly mortgage payment but increase the upfront costs of your loan. Taking the breakeven period into consideration is critical, as the amount of time it will take for to recoup the upfront cost must be weighed into the overall equation.
While the scale of points to the rate buydown will vary day-to-day depending on the market, a general rule of thumb is that 1-point (aka 1% of the loan amount) will typically reduce the interest rate by .375%. Consequently, on average, it will take almost 3.5 years to breakeven.
In our current high interest rate environment, many homebuyers are looking for ways to save money or increase their purchasing power. Buying discount points could help, but most economists see lower rates on the horizon. If rates come down over the next 12-24 months, many buyers will have the opportunity to refinance into a lower interest rate. However, if your purchased discount points, you likely won’t be able to recoup that upfront expense.
When we advise buyers on the purchase of discount points, every buyer’s unique scenario is taken into account. It’s important for us to look at all options, costs, and breakeven periods and analyze the numbers before deciding on the most beneficial loan solution.
Contact any of us to help you look at your options @alliedrockymountains.